Institutional Arrangements for Virtual Reverse Flow at Moffat

Transcription

1 Institutional Arrangements for Virtual Reverse Flow at Moffat DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: FURTHER INFORMATION: Decision Paper CER/11/113 4 th July 2011 cjohnston@cer.ie The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24.

2 CER Information Page Abstract: In December 2010 the Commission for Energy Regulation ( CER ) produced a consultation paper (CER/10/238) seeking views on how virtual reverse flow arrangements should be designed and implemented at the point of interconnection between the Irish and Great British ( GB ) natural gas transportation systems at Moffat in Scotland (the Moffat Interconnection Point ). The Consultation Paper presented the virtual reverse flow proposals put forward to industry to date, and set out the outstanding substantive issues to be addressed in order to progress the project. This paper summarises the written and oral comments of respondents to the Consultation Paper and sets out the CER s decision regarding how the implementation of a virtual reverse flow service will be progressed at the Moffat Interconnection Point over the coming months to achieve an implementation deadline of 1 st October Please note that this Decision Paper does not deal with physical reverse flow arrangements at Moffat which will be the subject of a market test consultation in accordance with Regulation (EU) No. 994/2010 to be jointly carried out by Gaslink and National Grid shortly. Target Audience: Gas Suppliers, Shippers, Storage Operators, Producers, Gaslink, National Grid, the NGEM, DCENR, Ofgem and the Utility Regulator of Northern Ireland (UR). Related Documents: CER/10/238 Consultation Paper on Reverse Flow Arrangements at Moffat Joint TSO Paper Moffat Virtual Reverse Flow Basic Transporter Virtual Reverse Flow Arrangements Draft for Industry Consultation (to be published shortly) A043 Gaslink Code Modification Proposal Virtual Moffat Reverse Flow Gaslink Code of Operations Regulation (EC) 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks Regulation (EU) No 994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply OFGEM Notice of decision to modify Condition C8D of National Grid Gas Plc s National Transmission System (NTS) Transporter licence to add an NTS entry point (Moffat Entry Point) directionmoffatfinal.pdf

3 UNC Code Modification Proposal The Introduction of an Interruptible Reverse Flow service at Moffat Interconnector 3

4 Executive Summary This paper details the CER s response to the Consultation Paper (CER/10/238) published in December 2010 which sought views on how virtual reverse flow arrangements should be designed and implemented at the point of interconnection between the Irish and Great British ( GB ) natural gas transportation systems at Moffat in western Scotland (the Moffat Interconnection Point ). A variety of responses were received from market participants to the December Consultation Paper. Having taken the written and oral comments of respondents into consideration, the CER has decided to progress the development of TSO-TSO arrangements to administer virtual reverse flow nominations and allocations at Moffat to achieve the implementation of the service by 1st October This is with a view to avoiding further delay in Ireland meeting its obligations under Regulation 1775/05/EC and mitigating the risk that alternative proposals to modify the existing Agency arrangements to accommodate virtual reverse flow are not successfully passed. Please note that this Decision Paper focuses on the virtual reverse flow institutional arrangements at Moffat, however comments were received on other aspects of the virtual reverse flow service and each of these are addressed in Section 4 of this paper. At the request of the CER and Ofgem, Gaslink and National Grid have developed a Joint TSO consultation paper on these TSO-TSO arrangements which will be published shortly. It must be noted that this does not prevent or exclude a virtual reverse flow service being implemented via modification to the existing Agency arrangements should such a proposal be successfully passed by the Moffat Shippers and implemented by 1 st October For the avoidance of doubt, in the event that the Moffat Shippers agree and pass an alternative arrangement that is acceptable to the Regulators (Ofgem, CER and the Utility Regulator) and TSOs and is implementable by 1 st October 2011, it is the Regulators intention that these alternative arrangements will be implemented. In light of the forthcoming changes required under the 3 rd Package, particularly in respect of the obligation to establish EU Network Codes at Interconnection Points, this paper also highlights the Regulators intention to review the arrangements at Moffat on a medium term outlook to assess how the regulatory, transportation and agency arrangements may need to be amended to best accommodate the forthcoming European requirements. 4

5 Table of Contents Executive Summary Introduction The Commission for Energy Regulation Purpose of this Paper Comments Received Structure of this Paper Background Information EU Infringement - Regulation (EC) 1775/ Virtual Reverse Flow progress achieved to date Joint Regulatory and TSO Engagement Legislative Background CER s Decision on Virtual Reverse Flow Arrangements at Moffat CER s Decision Response to Comments Received Next Steps

6 1.0 Introduction 1.1 The Commission for Energy Regulation The Commission for Energy Regulation ( CER ) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The CER was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act, The enactment of the Gas (Interim) (Regulation) Act, 2002 expanded the CER s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the CER additional powers in relation to gas and electricity safety. The CER is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector. 1.2 Purpose of this Paper The purpose of this Decision Paper is to: set out the decision of the CER regarding how the implementation of a virtual reverse flow service at the Moffat Interconnection Point will be progressed over the coming months respond to relevant submissions received to the December Consultation Paper and outline the next steps in relation to these matters. 1.3 Comments Received The CER received responses to the Consultation Paper from 15 parties. Nonconfidential responses are listed below and are published in conjunction with this paper on the CER website unless otherwise requested. 1. Gazprom Marketing and Trading Retail Ltd 2. Shell E&P Ireland Limited 3. Harper Energy Limited 4. PSE Kinsale Energy Limited 6

7 5. ESB International 6. Tethra Energy 7. Vermillion Energy 8. Statoil (U.K.) Limited 9. Gaslink 10. Manx Electricity Authority 11. Bord Gáis Energy 12. Premier Transmission Limited 13. National Grid Plc 14. Viridian Power and Energy Limited In reaching its decision, the CER has taken into consideration of the arguments presented in the submissions and representations made by the parties above. 1.4 Structure of this Paper This paper is structured as follows: Section 2 details the relevant legislation pertaining to the issues and decisions set out in this Decision Paper, as well as other background information. Section 3 sets out the CER s decision in light of the responses received to the Consultation Paper and further discussions with OFGEM (GB Regulator of gas and electricity markets), UR (Utility Regulator of Northern Ireland) and the TSOs (Gaslink and National Grid) in respect implementing a virtual reverse flow service at Moffat by 1st October 2011 Section 4 sets out the principal points from respondents to the Consultation Paper and includes the CER s views in this regard Section 5 sets out the next steps in relations to these matters 7

8 2.0 Background Information At present natural gas enters the Irish transportation system at two points, the Inch Entry Point in County Cork and the Moffat Entry Point in Scotland. The Moffat Entry Point constitutes a connection between two regulated natural gas pipeline systems, the National Transmission System ( NTS ) in Great Britain and Gaslink system in Ireland. Gas physically flows in one direction from Moffat in Scotland downstream to three jurisdictions (Ireland, Northern Ireland and Isle of Man) via two sub-sea interconnector pipelines. Currently 96% of Ireland s natural gas demand, and 100% of Northern Ireland s and Isle of Man s demand, is met through this Interconnection point. The transportation of natural gas in Ireland is governed under the Code of Operations ( Code ), a legal and contractual framework between the Transporter and Shippers detailing the rules for the provision of transportation services on both the Transmission and Distribution Networks. The transportation arrangements embodied in the Code, including the range of capacity products on the Irish network, have been developed by the Irish Transmission System Operator ( TSO ), Gaslink, with approval by the CER, to best meet market demand, European legislative requirements and system integrity needs. 2.1 EU Infringement - Regulation (EC) 1775/2005 In June of 2009 Ireland received a formal notice of infringement from the European Commission stating that Ireland was non-compliant with Regulation (EC) 1775/ for, inter alia, failing to offer a backhaul or reverse flow service, at least on a virtual basis, at the Moffat Interconnection Point. The European Commission hold the view that the requirement to make available maximum capacity at all relevant points under Article 5(1), when read in conjunction with obligation to provide firm and interruptible third party access services referred to in Article 4, implies that TSOs must offer capacity in both directions on their pipeline system. In cases where it is not technically possible to physically transport gas in both directions, the infringement letter notes that it is still possible for a TSO to offer capacity as a counter flow or backhaul in the other direction, on a virtual basis 2. The UK Government received a similar formal notice of infringement for not offering capacity in both directions at Moffat. Although the Irish authorities interpretation of Regulation 1775/2005 in respect of the requirement to make available either virtual or physical reverse flows at interconnection points differs to the European Commission s, as a matter of policy Ireland undertook over the past 12 months to develop Virtual Reverse Flow arrangements at Moffat. 1 Regulation (EC) 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks. 2 Letter of formal notice Infringement No 2009/2188 Commission of the European Communities, 25 th June

9 2.2 Virtual Reverse Flow progress achieved to date The introduction of a virtual reverse flow service at an interconnection point between two separate gas transportation systems with differing regulatory, contractual and transportation regimes is complex. It also cannot be implemented unilaterally by one jurisdiction alone. To establish a workable virtual reverse flow service for shippers requires compatible changes to be made to the existing arrangements on both sides of the Moffat flange, as well as the support and cooperation of the relevant Regulatory Authorities and System Operators in each jurisdiction and the community of Shippers registered to trade at the flange. To initiate the changes on the Irish side of the flange, in January 2010 Gaslink submitted a Code Modification Proposal to the Gaslink Code of Operations 3 to accommodate the introduction of virtual reverse flow at the Moffat Entry Point on the Irish system. Subsequent to this proposal, in June 2010, Gaslink also issued draft Virtual Moffat Reverse Flow Business Rules for consultation. In addition to these draft business rules, both the Moffat Agent and Gaslink have presented separate proposals regarding the administration of virtual reverse flow nomination and allocations at industry fora, such as the Code Modification Forum and the Moffat Agency Meetings. Although a lot of progress had been achieved by the end of 2010 the CER was keen to expedite the development of a virtual reverse flow service at Moffat and to this end issued a Consultation Paper (CER/10/238) in December 2010 seeking views on: The draft Virtual Reverse Flow Business Rules (issued by Gaslink) The Transporter s Proposal to administer Virtual Reverse Flows at Moffat The Moffat Agent s Proposal to administer Virtual Reverse Flows at Moffat An alternative Third Option to administer Virtual Reverse Flows at Moffat Feedback received from Industry Outstanding issues to be addressed The CER received 15 responses to this Consultation Paper and these are summarised in Section 4 of this paper. 2.3 Joint Regulatory and TSO Engagement In parallel to the CER consultation on virtual reverse flows, and recognising the urgency and cross border challenges of implementing virtual reverse flow at Moffat, the CER has engaged with OFGEM and UR in the form of monthly Joint Regulatory meetings to address many of the issues outlined in the December Consultation paper. To avoid further delay and mitigate against the risk that alternative proposals to modify the existing Agency arrangements to accommodate virtual reverse flow are not successfully passed, the Regulators requested both TSOs (Gaslink and National Grid) to work together to progress TSO-TSO arrangements to facilitate the administration of virtual reverse nomination and allocations at Moffat. To this end, Gaslink and National 3 Gaslink Code of Operations Modification Proposal Number A043 Virtual Reverse Flow Submitted 28th January

10 Grid have developed a Joint TSO consultation paper on these TSO-TSO arrangements which will be published shortly. It must be noted that this does not prevent or exclude a virtual reverse flow service being implemented via modification to the existing Agency arrangements should such a proposal be successfully passed by the Moffat Shippers and implemented by 1 st October For the avoidance of doubt, in the event that the Moffat Shippers agree and pass an alternative arrangement that is acceptable to the Regulators (Ofgem, CER and the Utility Regulator) and TSOs and is implementable by 1 st October 2011, it is the Regulators intention to implement these alternative arrangements 2.4 Legislative Background Under the Gas (Interim) (Regulation) Act of 2002, the CER is responsible for approving the commercial and legal framework governing access to, operation and development of the gas market, including Third Party Access, Transportation Services, Connection Policy and Financial Security Arrangements. The transportation of natural gas in Ireland, including the development and availability of capacity products on the network, is governed under the Gaslink Code of Operations, published by the Transporter with the approval of the CER. The Code of Operations may be modified by a direction of the CER, or through a process whereby modifications are proposed by a Shipper, an interested third party or the Transporter following which the relevant modifications are progressed through an appropriate consultative process chaired by the CER. Under Irish legislation the CER may direct changes to the Code, but the CER where possible facilitates consultation on all Code Modifications, including modification to fulfil any legal requirement to ensure that services, including mandatory services, are provided in a manner which is effective, efficient and suitable to industry. Regardless of the modification process, the CER decides on all modifications proposals to the Gaslink Code. Transportation arrangements relating to gas flow nominations and gas allocations across Moffat flange, however, are not directly governed under the Gaslink Code of Operations 4, but via an Agency Regime. This Regime is governed under two agreements, the Moffat Agency Agreement (MAA) and the Offtake Profile Notice (OPN) Agency Agreement, which provide for the administration of gas flow nomination matching and allocations on both sides of the interconnector point, as well the generation and management of the offtake profile of gas flows. These voluntary Agreements, which predate the CER, are agreed and signed between the Agent and Shippers at the flange and are subject to only indirect regulatory oversight by each of the national regulatory authorities in the jurisdictions upstream or downstream of Interconnector Point. The natural gas transportation arrangements in Ireland must also comply with European legislative requirements relating to, among other things, setting non-discriminatory rules for access conditions to natural gas transmission systems, harmonised principles for capacity-allocation, tariffs and congestion-management, the determination of transparency requirements, balancing rules and imbalance charges, and the facilitation of capacity trading, as well as security of supply and infrastructure requirements 5. 4 Although, default arrangements do exist in the Gaslink Code of Operations 5 These requirements are contained in the Gas Regulation 715/2009, Gas Directive 2009/73/EC, Security of Supply Regulation 994/2010, Gas Regulation 1775/

11 Many of these European rules are now contained within the 2009 Third Package, which, in respect of natural gas, consists of a Directive 6 concerning common rules for the internal market in natural gas and a Regulation 7 on conditions for access to the natural gas transmission networks. The requirement to establish EU Network Codes under the Gas Regulation (EC) 715/2009, which will embody many of the above rules, are still being developed and it is expected will become applicable after the implementation of a virtual reverse flow service at Moffat. Thus the service will have to be reviewed once the European rules become legally enforceable to ensure compliance. It must be noted that virtual reverse flow arrangements at Moffat will be implemented before the introduction of the Common Arrangement for Gas ( CAG ). At this point in time the CER is of the view that the reverse flow service will be preserved under the CAG transportation arrangements. However, it may need to be reviewed to ensure it is consistent with the new All-island transportation arrangements and available to all Shippers on the Island, both Northern Ireland Shippers and Irish Shippers. 6 Gas Directive 2009/73/EC 7 Gas Regulation 715/

12 3.0 CER s Decision on Virtual Reverse Flow Arrangements at Moffat This section sets out the CER s decision regarding the implementation of a virtual reverse flow service at the Moffat Interconnection Point. This decision has been reached in light of both the responses received to Consultation Paper and further discussions with OFGEM, UR (Northern Ireland Authority for Utility Regulation), Gaslink and National Grid in respect of implementing a virtual reverse flow service at Moffat by 1 st October CER s Decision CER Decision to progress virtual reverse flow arrangements The CER, in consultation with both Ofgem and UR and recognising the difficulty of successfully modifying the existing Moffat Agency arrangements to incorporate virtual reverse flow, has decided to progress the development of TSO-TSO arrangements to facilitate a virtual reverse flow service at Moffat to achieve the implementation of the service by 1st October Proposed TSO-TSO arrangements developed by Gaslink and National Grid To this end, Gaslink and National Grid have worked together to develop TSO-TSO arrangements at the request of the Regulators. These arrangements include the revision of the Connected Systems Agreement at Moffat and new arrangements for the development of the Offtake Profile Notice by or on behalf of the Irish Transporter. The Irish Transporter will issue the Offtake Profile Notice to National Grid. These proposed arrangements take into consideration the comments received to the CER s December Consultation Paper and are set out in a Joint TSO Consultation Paper which will be published by the TSOs shortly. This paper contains proposals detailing, for each side of the Moffat flange and where possible in a coordinated manner, virtual reverse flow capacity availability calculations, nomination timelines, capacity allocation mechanisms, booking processes and interruption methodologies. It also sets out proposed tariffing or pricing information for virtual reverse flow capacity offered on each side of the flange. Alternative proposals to implement virtual reverse flow It must be noted that this does not prevent or exclude a virtual reverse flow service being implemented instead via modification to the existing Agency framework, should such a proposal be successfully passed by the Moffat Shippers and implemented by 1 st October In this regard, the Regulators understand that a formal proposal to modify the existing Agency arrangements to accommodate virtual reverse flows has recently been submitted to the Moffat Agent. For the avoidance of doubt, in the event that the Moffat Shippers agree and pass an alternative arrangement that is acceptable to the Regulators and TSOs and is implementable by 1 st October 2011, it is the Regulators intention to implement these alternative arrangements. 12

13 In the mean time the Regulators cannot risk further delay to implementing a virtual reverse service at Moffat and given that European legislation places an obligation on Transmission System Operators to implement this service, in the absence of a viable and accepted alternative the Regulators must pursue its development via the TSOs. Next Steps Industry feedback on the TSO-TSO arrangements proposed in the Joint TSO Consultation Paper will be considered by the Regulators before finalisation, and it is envisaged that these arrangements will form the basis of a virtual reverse flow service to be implemented at Moffat by 1 st October However, in the event that the Moffat Shippers agree and pass an alternative arrangement that is acceptable to the Regulators and TSOs, it is the Regulators intention these alternative arrangements will be implemented and the processes described in the Joint TSO Consultation Paper will form the basis of default arrangements. Considering Moffat arrangements in the medium term It must be pointed out that the Regulators view the implementation of a virtual reverse flow service by 1 st October 2011, whether through the existing Agency arrangements or via a TSO-TSO arrangement, as an interim solution pending the implementation of the 3 rd Package requirements at Moffat. The consideration of implementing a virtual reverse flow service at the Moffat Interconnection Point has highlighted a number of concerns with the existing Agency arrangements, particularly in respect of the ability of the Agency framework and underlying contractual agreements to accommodate change and respond to EU legislative requirements. The Regulators consider that the existing Moffat Agency arrangements will need to be reviewed in light of the 3 rd Package requirements, particularly in respect of the obligation to establish EU Network Codes under the Gas Regulation (EC) 715/2009, which will bring considerable change at the Interconnection Point. Any Agency Framework must not impede the implementation of these changes. Further, 3 rd Package requirements relating to cross-border infrastructure will also have to be accommodated. For example, Article 41(6) of Directive 2009/73/EC states that National Regulatory Authorities shall be responsible for approving access to cross-border infrastructures and thus this represents a new role for both National Regulatory Authorities at the Moffat Interconnection Point. These new regulatory obligations under the 3 rd Package have yet to be brought into force in either jurisdiction and the CER and Ofgem are closely cooperating on these issues. The Regulators therefore intend to publish a consultation paper later this year on the medium term outlook for the Moffat Interconnection Point and specifically how the regulatory, transportation and agency arrangements at this interconnection point may need to be amended to best accommodate the forthcoming European requirements. 13

14 4.0 Response to Comments Received The CER examined the comments of all respondents to the Consultation Paper. We would like to thank the respondents for their contributions to the consultation process. The principal points raised by respondents are summarised below and are accompanied by the CER s response. 4.1 The Moffat Agent Proposal There was both support for and opposition to the Moffat Agent Proposal, which would involve the Moffat Agent administering both the forward and virtual reverse flow nomination and allocations. Arguing against the Moffat Agent Proposal, two Respondents remarked that the scale of the contractual difficulties involved in amending the current Agency agreements and the time required to resolve these issues are likely to delay the implementation of the virtual reverse flow service. Another Respondent echoed this point stating that the substantial changes required to the MAA and the OPN agreements under this Proposal would be difficult to implement and may not be accepted by the Forward Flow Shippers. Another Respondent voiced concerned that the current Moffat arrangements effectively give the incumbent Shippers the ability to block desirable and required changes and advocated implementing arrangements that are fair, transparent and flexible. The same Respondent believed that both forward and reverse gas allocations at Moffat should be managed by an independent party, acting as the Agent of the Shippers. In line with these comments, a separate Respondent argued that the Moffat Agent Proposal should not be implemented, and went further to say that the current Moffat arrangements should be comprehensively reformed and rewritten and a new independent Moffat Agent should be appointed. This Respondent believed that the current rules governing access are overly cumbersome and need to simplified, including separating those areas which should be Shipper-to-Shipper and those that should be Transporter-to-Transporter. Another Respondent echoed this latter point, commenting that the current arrangement blurred the distinction between commercial shipper-to-shipper and physical transporterto-transporter issues. Other Respondents supported the Moffat Agent proposal. A number of Respondents argued that the existing Agency arrangements have worked well thus far and the Moffat Agent would be best suited to manage a virtual reverse flow service. Another Respondent commented that it would be better if one Agent administered both forward and virtual reverse flows. A further Respondent advocated against wholesale changes to the current contractual arrangements underpinning the Moffat Agency Regime and supported the introduction of a standalone Reverse Flow Agreement, a sub-option within the Moffat Agent Proposal. Finally, one respondent also supported the standalone Reverse Flow Agreement administered by the Moffat Agent, stating that this proposal would be the most cost-effective, efficient and transparent approach to implementing a virtual reverse flow service. 14

15 Commission s Response: The CER recognises that there is a benefit to administering all gas flow nominations and allocations at Moffat (both physical forward flow and virtual reverse flow) via a single party, i.e., the Moffat Agent. The CER would not be opposed to the implementation of a virtual reverse flow service via modification to the existing Agency arrangements for the purposes of achieving the Regulators deadline of 1 st October However, as raised by a number of respondents to the Consultation Paper, in the longer term the CER believes the existing Moffat framework for administering gas flows across the Interconnection Point should be reviewed. As mentioned above, the consideration of implementing a virtual reverse flow service at the Moffat Interconnection Point has highlighted a number of concerns with the existing Agency arrangements, particularly in respect of the ability of the Agency framework to accommodate change and respond to EU legislative requirements. Further, there is a risk that the present modification process under the Agency may result in the needs of smaller Shippers or a minority of Shippers with differing needs to the majority to be marginalised. Finally, it should be noted that an Agency regime appears to be out of line with Europe s energy model of greater cooperation and interoperation by TSOs at interconnection points. To this end, the Regulators (CER, Ofgem and UR) intend to publish a consultation paper later this year on the medium term outlook for the Moffat Interconnection point to assess how the regulatory, transportation and agency arrangements at this interconnection point may need to be amended to best accommodate the forthcoming European requirements. 4.2 The Transporter (TSO to TSO) Proposal The majority of Respondents did not support the Transporters TSO-TSO Proposal. One Respondent was not in favour of the Transporter carrying out reverse flow nomination and allocation given that the role of an Agent, in the Respondent s view, is not a natural monopoly and therefore should be put out to tender and the relevant Shippers should be allowed to decide who should act as the Agent. In addition, a number of Respondents believed that this option would not be supported under the current GB arrangements. In line with this latter comment, another Respondent stated that the negotiating such TSO- TSO arrangements with National Grid is likely to lead to unwelcome delay to the introduction of the service. However, one respondent was in favour of facilitating virtual reverse flows via the Transporters TSO-TSO Proposal, arguing that TSO-TSO arrangements are consistent with arrangements being developed across Europe and that under this Proposal Shippers would not be required to sign and comply with multiple Agency Agreements. A further Respondent stated that they did not have any objections to the Transporter (TSO- TSO) proposal as long as the information flows required by National Grid remained accurate and reliable. Commission s Response: The CER finds merit in the Transporters TSO-TSO proposal given that this proposal is in line with European energy policy of greater cooperation and interoperation by TSOs at interconnection points. TSO-TSO arrangements would also be better placed to facilitate 15

16 and accommodate the forthcoming European provisions relating to the harmonising the rules at interconnection points in the form of EU Network Codes. Although this proposal was not favoured by the majority of respondents, the Regulators cannot risk further delay to implementing a virtual reverse service at Moffat and given that European legislation places an obligation on Transmission System Operators to implement this service, in the absence of a viable and accepted alternative the Regulators must pursue its development via the TSOs. Again, it must be noted that this does not prevent a virtual reverse flow service being implemented instead via modification to the existing Agency framework, should such a proposal be successfully passed by the Moffat Shippers and implemented by 1 st October For the avoidance of doubt, in the event that the Moffat Shippers agree and pass an alternative arrangement that is acceptable to the Regulators and TSOs and is implementable by 1 st October 2011, it is the Regulators intention to implement these alternative arrangements. 4.3 The Third Option A large number of Respondents supported the alternative third option to facilitate reverse flows at Moffat which would involve the establishment of a second and separate Agent (by those Shippers wishing to use the service) at Moffat for the purposes of administering virtual reverse gas flow nominations and allocations. One Respondent argued that this option would provide Reverse Flow Shippers the commercial freedom to create a new and separate set of commercial arrangements to deal with reverse flow nominations and allocations at Moffat. Another Respondent believed that the Third Option is the simplest and most straight forward to implement. The same Respondent added that this Option would also be the most acceptable solution to Forward Flow Shippers given that the necessary changes to the existing Agency Agreements would be minimised. This Respondent made an additional point that, for reasons of cost savings and operational efficiencies, the party currently performing the Moffat Agent role could also be used as the separate Reverse Flow Agent. However, another Respondent disagreed stating that the Reverse Flow Agent should be independent. A further two Respondents argued that the alternative third option Proposal would allow for virtual reverse flow costs to be transparently allocated to those availing of the service. Furthermore, a final Respondent commented that the third option provides the opportunity to test the new reverse flow arrangements and thereby better inform future reverse flow mechanisms in advance of implementing costly and complex solutions. One Respondent did not support the Third Option proposal, stating that Agency arrangements are inconsistent with what is being developed across Europe. This Respondent also added that there would be difficulty in ensuring the interoperability of the two Agency Agreements inter-se and with the two TSOs. Contrary to this argument, one Respondent believed that this proposal would not introduce the complexity to the Moffat arrangements nor increase the risk to Shippers. 16

17 Commission s Response: The CER does not have particular objections to this proposal, however, there may be issues relating to the interaction of three separate agreements (MAA, OPN and a new Standalone Reverse Flow Agreement) governing flows and allocations at Moffat and potentially two separate Agents separately administering forward flows and reverse flows. The CER is keen to avoid the introduction of extra complexity to the administration of gas flows at Moffat. However, as with the Moffat Agent Proposal, although the Regulators are pursuing the development of TSO-TSO arrangements this does not prevent a virtual reverse flow service being implemented instead via the introduction of a Standalone Reverse Flow Agency, should such a proposal be successfully passed by the Moffat Shippers and implemented by 1 st October In respect of the costs incurred by the Moffat Agent to facilitate the virtual reverse flow, the CER is of the view that in principle the development costs of the service should be recovered from all gas customers given that the obligation to introduce the service arises from a European legislative requirement. In this regard, the CER will engage with Ofgem to discuss cost sharing arrangements. 4.4 Alternative Options to Administering Virtual Reverse Gas Flows? As mentioned above, two Respondents did not support any of the proposals put forward in the paper and stated that the current Moffat Agent arrangements should be comprehensively reformed and rewritten with a new independent Moffat Agent should be appointed. One Respondent believed that the current rules governing access are overly cumbersome and need to simplified, including separating those areas which should be Shipper-to-Shipper and those that should be Transporter-to-Transporter. Another Responded echoed this later point, commenting that the current arrangement blurred the distinction between commercial shipper-to-shipper and physical transporter-totransporter issues. A further Respondent added that system operators should focus on the physical management of the system, reacting to nominations they receive, a shippers agent should subsequently match those nominations and allocate deliveries. One Respondent put forward an alternative solution to facilitating virtual reverse flow at Moffat that involved all UK NTS Shippers wishing to import or export gas to Ireland making nominations to a Single Party Shipper (SPS) located at the National Balancing Point (NBP) in GB. The SPS would make a single exit nomination at the Moffat Exit on behalf of all of the UK Shippers based on the aggregated forward and reverse flow nominations received. The SPS would also be responsible for making the appropriate capacity bookings on the interconnector and billing users accordingly. This Respondent argued that these arrangements would have the advantage of providing Irish Shippers with effective access to the NBP without having to become an NTS Shipper. The Respondent further added that this alternative arrangement would give Ireland more control over capacity bookings at Moffat as the title transfer of gas bound for Ireland would occur at the NBP. 17

18 Commission s Response: The CER agrees with two of the Respondents in that the existing Agency arrangements need to be reviewed. In this regard, the Regulators intend to publish a consultation paper later this year on the medium term outlook for the Moffat Interconnection Point and specifically how the regulatory, transportation and agency arrangements at this interconnection point may need to be amended to best accommodate the forthcoming European requirements. The alternative solution to facilitate virtual reverse flow put forward by the Respondent merits further consideration; however the CER does not consider it to be a viable option in terms of achieving the implementation of a virtual reverse flow service by 1st October Optimal proportion of virtual reverse flow capacity that should be allocated to long-term and short-term products? There were a wide variety of views expressed in response to this question. One respondent argued that the optimal proportions should be based on market demand, and this respondent believed the market would favour shorter-term products, particularly a within-day product. In line with this view, another Respondent argued that a virtual reverse flow service could be best used via short term products (primarily as a daily product) and therefore a greater proportion of capacity should be allocated to short-term products. A number of respondents argued that a combination of long term and short term products (e.g., annual, quarterly, monthly, daily and in particular within-day) should be made available to the market. One of these Respondents added that these products should be offered in equal amounts to encourage as many entrants to use Moffat as possible. However, another Respondent suggested that the amount of capacity held back for each product... [daily, monthly and annual]... would be set as a percentage of the forward flow, with these levels being based on historic forward flow utilisation. Another Respondent commented that at this stage preference should be given to longterm products, arguing that annual reverse flow capacity should be made available first and in the event that not all of the annual capacity is purchased, Shippers could use short-term products if they felt there was more value in this. A separate Respondent argued that a variety of products (long term and short term) should be offered, with a proportion of capacity reserved for the shorter term products. Commission s Response: The introduction of a virtual reverse flow service at an interconnection point between two separate gas transportation systems with differing regulatory, contractual and transportation regimes is very complex. The initial introduction of the service, the CER believes, should be accompanied with a limited number of virtual reverse flow products, or perhaps only one product, to ensure the safe and robust operation of this new service. In this regard, a greater proportion of respondents have expressed a demand for shortterm products to be offered. Both Gaslink and National Grid have taken this into account 18

19 and propose to offer a daily (interruptible) virtual reverse flow product on each side of the Moffat flange. Further detail of this proposal can be found in the Joint TSO Consultation Paper which will be published by the TSOs shortly. Once the service has bedded down, it is envisaged that the product offerings will be reviewed and consideration will be given to implementing a greater range of products at a later stage. 4.6 Level of Regulatory Oversight There was no common consensus amongst respondents regarding the appropriate level of regulatory oversight at Moffat. One Respondent was not in favour of regulatory involvement in the Agency arrangements arguing that the Agent is not a monopoly activity and the appointment and the Agent s terms and conditions is a commercial activity to be approved by Shippers. Another Respondent suggested that regulatory involvement should be restricted to ensuring that new services are not blocked or that their usefulness is not restricted so as to benefit the incumbents. A further Respondent did not advocate direct regulatory control at Moffat but stated that the CER should intervene where there is unreasonable behaviour by Shippers. Other Respondents advocated light touch regulation at Moffat or none at all. Contrary to this view, one Respondent expressed concern at the lack of direct Regulatory oversight on the Irish side of the Moffat interconnector at present and believed that the current Moffat Agency arrangements should be constantly monitored by the CER. Another Respondent also commented that the CER should regulate activities at Moffat until transportation rights and regulation are decoupled. This Respondent noted however that an independent and autonomous Agency at Moffat would forego the need for direct regulatory oversight. A further respondent suggested from an overall policy context that CER oversight would be preferable for consistency and future planning policy in the gas market; however this Respondent sought clarification on the potential consequences of such oversight, that is, would regulatory involvement extend to contracts with counterparties? One respondent was of the view that this matter lay outside the context of the consultation and should be considered within a European context. Commission s Response: While the CER is not necessarily in favour of a high degree of regulatory oversight at the Moffat Interconnection Point, there is a case to be made for a level of regulatory involvement to ensure that the gas markets downstream of this Interconnection Point as well as the arrangements at the Interconnection Point are developed to the benefit of gas customers and compliant with European legislation. It is envisaged that this question of regulatory oversight at the Moffat Interconnection Point will be considered as part of Regulators Joint consultation paper on the medium term outlook for the Moffat Interconnection Point. 19

20 4.7 Virtual Reverse Flow Products There were varying views on whether a firm or interruptible virtual reverse flow capacity product, or a combination of both, should be made available to Shippers. One respondent argued that the products offered should reflect the market demand, and suggested that the market would favour a short-term interruptible product available within-day. A further respondent suggested that the virtual reverse flow products should be aligned with the existing forward flow products. Three Respondents argued that a range of products should be offered. Of these Respondents, one Respondent argued that the more products available the more likely shippers will be to use Moffat and to foster competition. Another Respondent argued that a variety of products will allow different sized players to enter the market on their own terms. A number of respondents advocated that an interruptible product should be made available, while other respondents believed that both firm and interruptible flow products should be offered. However, a further Respondent called into question the demand from Shippers for firm virtual products and believed that interruptible virtual products are wholly adequate at present. Some Respondents queried how a firm product could be offered by the Transporter given that the virtual reverse flow service is dependent on there being forward physical flow to net off against, and thus by its nature is interruptible. A large number of respondents advocated the inclusion of anti-hoarding provisions among the product offerings. Commission s Response: In respect of the firm virtual reverse flow capacity, although Gaslink had originally proposed that a small percentage of the minimum daily forward flow, derived from historical and projected flows, could be made available on a firm basis, following further modelling work undertaken by Gaslink it was determined that offering firm virtual reverse flow capacity would not be feasible. Virtual reverse flow is proposed to be made available as a Day ahead Interruptible product, which is standard at backhaul European Interconnection Points. As pointed out above, to ensure the safe and robust operation of this new service, Gaslink propose to initially offer a daily interruptible virtual reverse flow product on the Irish side of the side. Similarly, National Grid proposes to offer the same product on the GB side. Further detail can be found in the Joint TSO Consultation Paper which will be published by the TSOs shortly. Once the service have bedded down, it is envisaged that the product offerings will be reviewed and consideration will be given to implementing a greater range of products at a later stage. 20

21 4.8 Aligning Virtual Reverse Flow Products on both sides of the Moffat Flange The Consultation Paper received a range of differing views on the degree to which virtual reverse flow products offered on either side of the Moffat flange should be aligned. Two Respondents believed that the products did not need to be aligned to any great extent. However, a number of Respondents believed that although the products offered on either side of the flange need not match they should at least be operationally compatible. One Respondent suggested that a certain degree of harmonisation would be useful for shippers, especially in respect of capacity allocation methods, product duration, product characteristics (i.e., firm/interruptible), nomination and renominations. Other Respondents expressed concerned with the lack of consistency between product offerings proposed by each Transporter on either side of the flange. One Respondent argued that offering differing products on either side of the flange would be impractical, while a further Respondent believed that separate products would undermine the effectiveness of, and overly complicate, virtual reverse flow. Another Respondent argued that the products on either side need to be fully harmonised. Commission s Response: With a view to establishing a workable virtual reverse flow service for Shippers at Moffat, the CER believes that the virtual Exit product on the Irish side of the flange and virtual Entry product on the GB side of flange should at a minimum be compatible. In this regard, the Regulators have requested that Gaslink and National Grid in developing the TSO-TSO arrangements for 1 st October 2011 to coordinate where possible as many aspects of the virtual reverse flow service as possible, including the products offered on both sides of the flange. Further detail of this proposal can be found in the Joint TSO Consultation Paper which will be published by the TSOs shortly 4.9 VRF Capacity Allocation Methodology The majority of respondents were in favour of the use of auctions as the preferred method of virtual reverse flow capacity allocation. A number of Respondents argued that auctions are the best and fairest allocation method, and would allow equal access to capacity. Other Respondents stated that auctions would be a transparent allocation method. Concern was expressed by one Respondent that First Come First Serve (FCFS) could lead to a discriminatory outcome. However, two Respondents preferred FCFS, with one of these Respondents stating the virtual reverse flow allocation method should be similar to forward flow allocation arrangements. A separate respondent believed that FCFS would be an appropriate allocation method for annual virtual reverse flow products, however, should the product become oversubscribed on a consistent basis, a move to auctions should be considered. Another commented that the method of capacity allocation needs to be reviewed in conjunction with the method of interrupting the Virtual Moffat Reverse Flow (VMRF) service on a day when scarce VMRF capacity is available. 21

22 Two respondents did not state a preference for either allocation method but made the point that harmonisation of the allocation methods on either side of the flange would be important to minimise the risk to Shippers of capacity booking mismatch. Commission s Response: The CER believes that aligning the capacity allocation methods on both sides of the flange would benefit Shippers; however the Regulators understand from the TSOs that implementing the same allocation mechanism on both sides of the flange would not be achievable by 1 st October Further detail can be found in the Joint TSO Consultation Paper which will be published by the TSOs shortly. Harmonising the capacity allocation mechanisms will be reviewed at a later stage and especially in light of the forthcoming Third Package EU Network Code on Capacity Allocation Mechanisms (CAM) at Interconnection Points. In respect of concerns voiced in respect of FCFS, the CER does not believe the FCFS allocation mechanism would lead to a discriminatory outcome. FCFS is the mechanism by which forward flow capacity is offered to the market on the Irish side of the Moffat Interconnection Point and to date such concerns have not been raised by market participants Virtual Reverse Flow Tariffs A number of points were put forward by Respondents for consideration in the CER Tariff Paper 8. One Respondent made the point that the CER Tariff Paper should consider in particular the relative prices of firm versus interruptible products and short-term versus long-term reverse flow capacity products. Another Respondent argued that it is important that the reverse flow tariff is priced competitively in order to ensure that companies requiring virtual reverse flow at Moffat do not resort to using commercial alternatives such as swaps as this, the Respondent believed, would lead to lower interconnector revenues. Another Respondent similarly made the point that pricing virtual reverse flow capacity should be considered in the context of the actual costs of commercial alternatives. A further Respondent suggested that the pricing should be in line with the UK s claims validation agent, in that the reverse flow Agent should charge an annual fee, dependent on use, with an additional per transaction charge. Other Respondents argued that the virtual reverse flow tariffs should be in line with only administration costs of offering the services, which many believed would be minimal. A final Respondent suggested that 8 Note, the proposed tariffs in for the virtual reverse flow on the Irish side of the flange will now be set out in the Joint TSO paper Moffat Virtual Reverse Flow Basic Transporter Virtual Reverse Flow Arrangements Draft for Industry Consultation (to be published shortly) 22